Wells Fargo to cap subprime auto loans

Wells Fargo, the country’s fourth-largest bank, plans to impose a cap on auto loans for customers with bad credit — a move that comes amid a new boom in subprime lending.

The bank confirmed Monday that it will put in place a new cap to keep the volume of its subprime auto loans at or below 10% of its overall auto loan originations, which reached $30 billion in 2014. The news was first reported by The New York Times.

“We are firmly committed to responsibly offering access to credit to a wide spectrum of customers during all economic cycles,” a Wells Fargo spokeswoman said in a statement. “The percentage of originations we consider subprime based on our customised scorecard has remained generally stable at around 10% for more than a decade. In the fourth quarter, we formalised our existing risk management philosophy to manage overall subprime auto originations at 10%. This continues to ensure we’re responsibly managing risk while also tailoring our approach by local market.”

The Times added that Wells Fargo WFC, which has a reputation in the banking industry for prudent risk management, could serve as a bellwether in an industry currently experiencing a boom in subprime lending that has been driven, in part, by an increase in subprime auto loans. The current boom comes less than a decade after the implosion of the subprime mortgage lending market in the lead up to the 2008 financial crisis, though the subprime auto lending market still represents a fraction of the size of the market for subprime mortgages.

There has been increasing concern of late over the potential for another subprime bubble. Last week, the nation’s acting Deputy Attorney General, Sally Quillian Yates, promised “to be on the lookout for, and head off, any potential threat” for fraud in the subprime auto lending market.

(CORRECTION: This article has been corrected to reflect the fact that the 10% cap is on Wells Fargo’s overall auto loan originations, which reached $30 billion in 2014. The article has also been update to include a statement from the bank.)

Davos and tons of tech — five things to watch for in the week ahead

This was a busy week with earnings beginning to pour in, including from some of the biggest banks. JPMorgan JPM, Wells Fargo WFCNP, Bank of America BOFA and Citigroup C, all reported. It was also the kick off to the North American International Auto Show in Detroit.

The four-day work week ahead is even more packed (happy Martin Luther King Day on Monday!). A slew of earnings are scheduled from tech companies you’ve probably heard of, along with Starbucks and McDonald’s. The World Economic Forum in Davos also gets going with its usual mix of glitz and worry over various global crisis.

Here’s what you need to know for your week ahead.

1. Greetings from Davos!

Check Fortune.com regularly to get smart takes from Fortune’s Stephen Gandel and Editor Alan Murray, who will be reporting from the World Economic Forum in Switzerland. The event will start Wednesday and run through Saturday. You can count on heads of state, global financial leaders and tech moguls to be out in full force. In theory, the gathering is for improving the world through public-private cooperation. In practice, it’s a big business mixer.

2. Some big name tech companies report earnings

A number of tech companies report earnings this week. Starting things off Tuesday is Netflix NFLX and IBM IBM. Next up Wednesday afternoon is eBay EBAY. Verizon VZ carries the flag for telecom companies on Thursday.

3. The latest from Windows

It may not generate quite the same fanfare as Apple’s AAPL huge events, but Microsoft MSFT will get some headlines Wednesday when it unveils its latest about the Windows 10 operating system. Xbox’s chief Phil Spencer will be speaking, so you can also expect some gaming news to come out of the presentation. Terry Myerson and Joe Belfiore, two Windows Operating Systems Group execs, will also be there.

4. Top food companies will also be reporting

Starbucks SBUX and McDonald’s MCD, two of the most prominent U.S. restaurant companies, will put out their earnings this week. Starbucks will report first on Thursday evening. Meanwhile, McDonald’s will take center stage Friday morning.

5. Can’t forget about oil

This will be an important week for oil company watchers, who have a number earnings to look for amid sinking crude prices. On Tuesday, look out for oil services firms Baker Hughes BHI and Halliburton HAL. Energy companies have been forced to slash jobs and stop drilling. It will also be an opportunity to see how companies that are closely tied to oil prices like Delta Air Lines DAL are doing with the vastly lower fuel prices. Delta’s earnings will be Tuesday morning.

The lawsuit, which was filed on Monday in federal court in New York, alleges that Deutsche Bank DB engaged in a series of transactions meant to evade federal income taxes — leaving the U.S. government “with a significant, uncollectable tax bill,” according to the Justice Department.

“Through fraudulent conveyances involving shell companies, Deutsche Bank tried to make its potential tax liabilities disappear,”Manhattan U.S. Attorney Preet Bharara said in a statement. “This was nothing more than a shell game.”

The government went on to describe the alleged fraud, which included the German bank’s creation of three separate “shell companies” as well as a series of subsequent transactions involving those companies that federal authorities claim were designed to avoid federal tax laws.

Deutsche Bank responded to the allegation in a statement to Fortune, saying: “We fully addressed the government’s concerns about this 14-year old transaction in a 2009 agreement with the IRS. In connection with that agreement they abandoned their theory that [Deutsche Bank] was liable for these taxes, and while it is not clear to us why we are being pursued again for the same taxes, we plan to again defend vigorously against these claims.”

Wells Fargo in settlement talks over accusations it cheated taxpayers

(REUTERS) – Wells Fargo said on Wednesday it is in discussions with the U.S. government to resolve a lawsuit accusing the nation’s largest mortgage lender of cheating taxpayers by submitting ineligible home loans to a federal insurance program.

Wells Fargo, the fourth-largest U.S. bank by assets, disclosed the talks in a quarterly filing with the U.S. Securities and Exchange Commission.

In October 2012, the U.S. Department of Justice sued the San Francisco-based bank, saying it failed to report more than 6,000 loans that did not meet requirements for insurance under the Federal Housing Administration (FHA), and failed to properly review early payment defaults.

The government said this caused the FHA to pay out hundreds of millions of dollars in claims on loans that did not qualify for insurance.

Wells Fargo asked a federal judge in Washington, D.C. shortly after the complaint was filed to excuse it from the Justice Department’s claims, but was rebuffed in 2013. The bank’s appeal also failed.

At a June hearing in New York, a Justice Department lawyer said the bank and the government had tried several times to resolve their differences but were unsuccessful.

Jennifer Queliz, a spokeswoman for U.S. Attorney Preet Bharara in Manhattan, declined comment.

Wells Fargo is not the only big bank to face such allegations. JPMorgan Chase & Co, Bank of America Corp , Citigroup Inc and Deutsche Bank AG all reached settlements with the Justice Department over related issues in recent years.

The bank lowered its estimate of projected litigation-related losses to as much as $950 million above the sum already set aside at the end of September. That is down from an estimated $1.2 billion at the end of June, according to the SEC filing.

Warren Buffett’s 6 best investments of all time

These days, the thing to say if you want to sound smart about Warren Buffett is that the Oracle of Omaha’s crystal ball has cracked. In mid-October, headlines blared that Buffett had lost $2 billion in just two days on Coke and IBM IBM. Nevermind that Buffett has said those investements are long-term holdings, that he hasn’t sold a share of either company’s stock, and that he would prefer it if IBM’s shares stayed cheap, for now. It seemed to reinforce the notion that the world’s great stock picker had lost it.

Last year, the book value of Buffett’s Berkshire Hathaway badly trailed the S&P 500, increasing less than the broad market index over the past five years for the first time in history. Buffett has acknowledged that his hand picked successors Todd Combs and Ted Weschler, have done better in recent years than he has. (Combs’ and Weschler’s market beating performance was the subject of a recent Fortune story.) Earlier this year, The New York Times highlighted a recent study that found Buffett’s ability to do better than the market has mostly disappeared.

And yet, some of Buffett’s best investments of his entire career have been ones he has made in the past few years. What’s more, if Buffett has lost it, someone forgot to tell the market. Share of Berkshire brk.a are way up, have more than doubled in the past five years. That’s generally a reflection of how well investors think Berkshire’s stock market portfolio, still over 85% managed by Buffett and his long-time partner Charlie Munger, as well as the businesses they have bought over the years—including railroad company Burlington Northern, See’s Candies, and dozens of others—are doing. If Buffett has hit a lull, that’s only because the comparison he has built up for himself over the years is tough to top.

Here are Buffett’s greatest investments of all time, ranked by annual average rate of return. It’s a testament to how successful Buffett has been. Even some of Buffett’s best-known investment successes, like Coke KO, Capital Cities/ABC, Gillette, and auto insurance company Geico, were not good enough to make the list. Here are the ones that did:

Has Goldman Sachs run out of moves?

Goldman Sachs enjoys a mystique rivaling the élan of the New York Yankees. It’s the classiest name in the financial leagues; a sterling organization that may disappoint now and then, but whose heavy hitters you shouldn’t bet against; and the ultimate improviser in finding fresh ways to make money.

Right now, the fabled 145-year old investment bank is leading the news on Wall Street. For good or ill, Goldman GS remains an object of intense fascination. It’s getting pounded in the press over a whistleblower’s charges that it received special treatment from regulators at the New York Fed. According to a story on the public interest website ProPublica, Fed officials were so intimidated by the Goldman brass that they failed to block transactions that were as suspicious as they were lucrative—allegations Goldman vehemently denies. At the same time, Goldman recently confirmed its stature by overseeing early trading for Alibaba’s BABA historic IPO.

But how good, really, is Goldman Sachs? An analysis of its recent performance reveals that, for the present at least, Goldman is nowhere near the champion of old. Its record ranks somewhere between pretty good and mediocre. Its businesses, and the environment in which it operates, have shifted dramatically, and not in Goldman’s favor. The kind of adventurous investments that once swelled its earnings are now off-limits.

“In contrast to the past, they’re being extremely conservative in the way they’re managing, and it will take a couple of years to see how they adapt to the new environment,” says Keith Davis, a portfolio manager with Farr, Miller & Washington, which holds $20 million in Goldman shares.

The fear is that Goldman has run out of moves.

Goldman’s path forward is restricted by two barriers. First, its main franchise is now trading, a business that, for the time being, isn’t terribly profitable. The dominance of trading—making markets in stocks, bonds, commodities and currencies—represents a sharp break with the past. In 2000, 60% of its sales came from advising on mergers and acquisitions, raising money for corporations, and asset management. In 2013, those high-margin businesses accounted for just 37% of Goldman’s $34 billion in revenues. So the mix is now tilted toward a field that’s depressed, where a long-awaited rebound just isn’t happening.

Second, Goldman has traditionally generated big profits from “principal investments,” using its own capital to trade in and out of stocks, take ownership positions in companies, and invest in private equity and hedge funds. The Volcker Rule, a pillar of the Dodd-Frank banking reform legislation, bans proprietary trading and severely restricts the investments banks can make. This formerly lucrative channel is now mostly closed to Goldman.

As a result, Goldman’s profitability has suffered. From 2005 to 2007, Goldman delivered a spectacular return on equity of, on average, 28.4%. Since then, the bank has enjoyed just one excellent year. That was 2009, when markets began to thaw after the financial crisis and investors dumped bonds en masse, handing Goldman both huge volumes of trades and fantastic margins, or “spreads,” on those trades. Since 2012, its ROE has dropped to an average of 10.5% to 11%.

Still, that’s not bad. A major reason for the decline: new regulations have forced all banks to lower their leverage. Goldman used to support $20 in assets with every dollar of equity; today, a dollar in net worth backs just $10.50 in assets. That’s a good thing, since it should smooth the big swings in returns caused by high levels of debt. An ROE in the 10% to 11% range also looks good in a period where investors pocket just 2.5% on 10-year Treasury bonds. And Goldman’s ROE compares favorably to its rivals. Though it trails Wells Fargo (13.6%) and US Bancorp (12%), it waxes JP Morgan (8.3%), Citigroup (6.7%), and Morgan Stanley (6.5%).

For Goldman, the challenge is that an 11% ROE may be acceptable for now, but it will be far from adequate once interest rates rise. With treasuries back at their historic norms of 4% or 5%, and highly rated corporate bonds offering a couple of points more, investors will want better things from the likes of Goldman. Its profits, dominated by trading, are still vulnerable to sharp declines. In 2011, for example, Goldman earned a puny ROE of 3.6%. By contrast, the big banks can practically guarantee large increases in profits and ROE as interest rates increase. When that happens, they’ll benefit handsomely from the rising spread between the low-cost deposits and the rates on their mortgages and corporate loans.

It would bolster confidence if Goldman’s numbers were headed in the right direction. They’re not. Goldman is having difficulty finding profitable places to reinvest its earnings. It has essentially admitted as much by re-purchasing $12.2 billion in its own shares since 2011. But it’s still investing much of its earnings in the businesses, and those fresh investments are garnering sub-par returns. Since 2005, its common equity base has increased from $23.5 billion to $74.4 billion, an increase of $51 billion. But over those eight years, it’s added just $3.25 billion in earnings. So the return on newly added equity is a mere 6.4%.

Nor is the recent story reassuring. In the 12 months from June 2013 to June 2014, Goldman added $1.6 billion in capital. Its 12-month trailing earnings during that period, however, declined from $8.4 billion to $7.6 billion. So its ROE, driven by higher capital and lower profits, actually dropped from 11.8% to just over 10.6%.

These sluggish returns have been weighed down by Goldman’s primary franchise, trading. Today, Goldman holds an inventory of around $350 billion in securities that it has purchased from clients, and seeks to resell, at the widest margins possible. From 2008 to 2010, Goldman earned an average of 3.8% on its trading book. But since 2011, the margin has dwindled to a slender 1.2% to 1.3%.

The problem is basic: That inventory isn’t “turning over” nearly as fast as it used to, because hedge funds, mutual funds, and other clients have slowed the pace of their trading. Nor are spreads nearly as rich as in the aftermath of the financial crisis.

To return to its glory days, Goldman will need to generate far higher returns on that trading book. That’s the ticket to driving returns on equity to heights that would prove alluring in the coming, rising-rate environment of tomorrow.

In its 2013 proxy statement, Goldman revealed that it has set a 12% ROE target for a full payout on its long-term compensation plan. That’s an increase from just 10%, a surprisingly modest goal for such a hard-charging management team. But to reach even 12%, Goldman still has a ways to go.

“The 12% target is still a low bar,” says Davis. “I’m thinking 14% to 16% is where they should be.” He believes Goldman will get there. “If they can’t get to a 15% ROE in a business, they’ll get out of it,” he says. “It will take them a couple of years to get through it. If anyone can figure it out, they can.”

Indeed, when interest rates rise, trading could explode as investors pile into bonds. That trend would produce what Goldman needs most: A jump in turnover and margins in its big securities portfolio. Goldman fans also argue that because of the new capital requirements, big banks have exited fixed income, currency, and commodities trading. Hence, Goldman could find itself in a more commanding position than at any time in its recent history.

That scenario is certainly possible. It’s also possible that bond trading, Goldman’s strength, could go the way of market making in equities. Once highly lucrative, stock trading has become a low-margin, commoditized field executed on electronic platforms. New banking regulations mandate that derivatives go electronic as well. If the opaque bond market becomes more, rather than less, competitive, Goldman will fail to restore its once-sovereign profitability. If fixed income booms again—and especially if Goldman emerges as the unchallenged king of bond trading—it will be on the road to a great restoration. Think of it as the Yankees capturing yet another World Series.

Big banks are getting risky once again

Earlier this week, the nation’s largest banks reported the results of self-administered stress tests. The results do not hold as much significance as the ones administered later this year by the Federal Reserve, but they were notable. For the first time since the financial crisis, the stress tests showed that, at a number of banks, a key measure of readiness for the next crisis had dropped.

Citigroup C, for instance, said its tier one capital ratio—the amount of money a bank has on hand to cover loan and investment losses—would drop to 8.4% in another severe downturn. That’s down from 9.1% a year ago. At Morgan Stanley MS, capital levels could fall to 8.9%, down from 9.5% a year ago. Wells Fargo WFC dipped to 9.6% from 9.9%. And JPMorgan Chase JPM said it would have enough capital after a stress scenario to cover losses on 8.4% of its remaining risky assets, down from 8.5% a year ago.

Goldman Sachs GS was the only bank that came out looking better than it did last year, 10.4% versus 8.9%. Bank of America’s BAC results were the same as they were last year.

The drops are relatively small. And the banks are still far more prepared for a downturn than they were before the last recession. But the banks have spent much of the past six years socking away extra cash to make them look as safe as possible. Now, the pendulum is swinging back.

But there were signs of that already. About a month ago, the FDIC reported that, as of mid-year, banks had boosted lending by nearly $400 billion in the past 12 months, the biggest jump since late 2008. Also, at the end of the second quarter, JPMorgan reported that it was taking increased risk on its trading desk. It appeared to be one of the few banks to do so. But the others are likely to follow. The banks will report new risk numbers a few weeks from now, along with their earnings reports.

Already, some regulators are getting nervous. Bank regulators have warned a number of banks about a return to risky lending. And the Fed is contemplating new rules that would require the big banks to continue to add to their capital piles.

Remember, though, all of this renewed risk is good for the economy. While the Fed is telling banks not to take too much risk, its low interest rate policy is intended to get banks to lend more and, well, take more risk. And the fact that banks are lending more means the Fed’s efforts have been, at least partly, a success.

Regulators and the rest of us should not want the risk-taking pendulum to swing in just one direction. The question is whether the rules passed in the wake of the financial crisis will stop it from swinging too far back in the wrong direction.

Bank of America’s profit hit by $4 billion litigation expense

Bank of America’s net income fell 43% in the second quarter as the bank recorded a $4 billion pretax litigation expense and lower revenue.

Still, the results for the period were better than expected, a trend in many major banking second-quarter reports issued over the past several days.

Overall, BofA BAC reported net income of $2.29 billion, or 19 cents a share, down from $4 billion, or 32 cents a share, a year ago. The latest period included about 22 cents per share in litigation expenses. Revenue, net of interest expense, slid 4.3% to $21.96 billion.

Analysts surveyed by Bloomberg had expected an adjusted profit, excluding charges, of 29 cents a share on $21.6 billion in revenue.

“The economy continues to strengthen, and our customers and clients are doing more business with us,” Chief Executive Brian Moynihan said in a prepared statement. He touted several positive indicators: customers are spending more, brokerage assets have climbed by double digits and corporate clients are turning to BofA to finance business expansions and mergers.

Several major U.S. banks have reported second-quarter results that have exceeded expectations for the latest quarter, and many of the top executives at those companies have struck a bullish tone about the state of the U.S. economy as they look ahead to the back half of the year. Executives at Wells Fargo WFC and Citigroup C, for example, said the U.S. economy is gaining strength by adding jobs and as consumer spending increases. The housing market is also improving, according to some of those executives.

At BofA, consumer and business banking total revenue slid about 0.8% to $7.37 billion from a year ago due to lower net interest income and slightly lower card income, offset somewhat by higher service charge income.

Revenue also slid for the consumer real estate services business, hurt by fewer loan originations as well as lower servicing income. Still, revenue grew modestly for the global wealth and investment management business and for global banking.

Meanwhile, BofA also disclosed it reached a $650 million settlement with American International Group AIG to resolve residential mortgage-backed securities claims. The settlement was covered by litigation reserves as of June 30.

Overall, Goldman GS reported net earnings of $2.04 billion, up from $1.93 billion a year ago. On a per-share basis, which includes preferred stock dividends, earnings climbed to $4.10 a share from $3.70 a year earlier. Net revenue, including net interest income, jumped 6% to $9.13 billion.

Analysts surveyed by Bloomberg had expected a profit of $3.09 a share on $7.98 billion in revenue.

Several major U.S. banks have reported second-quarter results that have exceeded expectations for the latest quarter, and many of the top executives at those companies have struck a bullish tone about the state of the U.S. economy as they look ahead to the back half of the year. Executives at Wells Fargo WFC and Citigroup C, for example, said the U.S. economy is gaining strength by adding jobs and as consumer spending increases. The housing market is also improving, according to some of those executives.

On Tuesday, Goldman also struck a positive tone, with chief executive Lloyd Blankfein saying the company was pleased with the results “in the context of mixed operating conditions during the period.”

The company’s results were fuelled by the investment banking business, with revenue rising 15% to $1.78 billion. Revenue jumped 9% for investment management. Those increases offset a 10% drop in commissions and fees and a 19% slide for market-making revenue – a testimony to the way activity in financial markets had fallen as tighter regulation has come into force.

For investment banking, the revenue growth was bolstered by a 20% jump in underwriting, mostly due to “significantly” higher net revenue in equity underwriting and reflecting an industrywide improvement. Debt underwriting was slightly higher.

Meanwhile, net revenue in fixed income, currency and commodities client executive dropped 10% from a year ago, hurt by lower revenue in currencies and to a lesser extent, commodities. Net revenue in credit products were slightly lower, though revenue increased in mortgages and interest rate products.

Wells Fargo’s credit performance continues to improve

Wells Fargo’s second-quarter profit climbed 4% from a year ago as the bank reported fewer credit losses, helping offset a slight decline in revenue and a drop in home lending orientations.

The world’s most valuable bank by market capitalization on Friday said credit performance continued to improved in the second quarter as credit losses remained at historically low levels and nonperforming assets continued to decrease. The bank is the first major U.S. lender to report results for the quarter, and thus the results will be closely watched as an indication of what’s to come from banking peers.

Wells Fargo reported net income of $5.73 billion, or $1.01 a share in the latest period, up from $5.52 billion, or 98 cents a share, a year ago. Total revenue slid 1.5% to $21.07 billion.

Analysts surveyed by Bloomberg had projected a profit of $1.01 a share on $20.84 billion in revenue.

“The primary drivers of Wells Fargo’s business remained strong in the second quarter, with broad-based loan growth, increased deposit balances, and improved credit quality,” said Chief Financial Officer John Shrewsberry in a statement.

In a sign of strength, Wells Fargo earlier this year boosted its quarterly dividend payout by 17% and announced a plan to increase share repurchases this year. The bank’s executives have said reduced household leverage, ample supplies of cash held by businesses, and improved economic activity are all factors that should bolster demand for the bank’s products. Wells Fargo also has a key advantage, as it is the sold bank lender for about 80% of its clients, allowing it to have a deep relationship with those customers and cross-sell products.

But Wells Fargo WFC is also the leading mortgage originator in the U.S., and thus has been hurt by an industrywide decline in mortgage volume. Home lending originations totaled $47 billion in the latest quarter, compared with $112 billion a year ago and $36 billion in the prior quarter.

Still, consumer lending has been bolstered by autos and credit cards, helping offset the mortgage business weakness. Total average loans were $831 billion in the latest quarter, up 4% from a year ago.

Meanwhile, the company’s credit-loss provisions totaled $217 million, compared with $652 million a year ago.

Net interest margin totaled 3.15% in the latest quarter, compared with 3.47% a year ago and 3.20% in the first quarter. That metric is an important measure of lending profitability.